Church & Dwight Co., Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in millions except per-share data. The company sells household and personal care products and specialty chemicals through Consumer Domestic, Consumer International, and Specialty Products (SPD) segments.
Financial performance
- Revenue: Q2 net sales were $898.0, up 2.3% year over year; first-half sales were $1,775.2, up 2.8%. In Q2, volume contributed 6.2% and acquired product lines 1.1%, offset by pricing/product mix of negative 4.4% and foreign exchange of negative 0.6%.
- Profit and EPS: Q2 operating income was $123.2, down 29.7%, and net income was $72.9 versus $111.6. Diluted EPS was $0.29 versus $0.43. First-half operating income was $319.3, down 10.0%; net income was $204.4 versus $224.6; diluted EPS was $0.79 versus $0.85.
- Margins: Q2 gross margin was 45.7%, down 80 basis points; operating margin was 13.7%, down 630 basis points. First-half gross margin was 45.6%, unchanged, and operating margin was 18.0%, down 260 basis points.
- Cash flow: First-half operating cash flow was $249.3 versus $296.5; investing cash flow was negative $242.3, principally reflecting acquisitions; financing cash flow was positive $33.2. Cash increased to $237.6 from $187.8 at year-end.
- Debt and liquidity: At June 30, short-term borrowings were $629.3 and long-term debt was $894.1. The company reported approximately $369 of availability through its revolving facility and commercial paper program, plus a conditional commitment-increase feature of up to $600. Current assets were $877.2 and current liabilities were $1,211.7.
- Capital returns: First-half dividends paid were $95.7 and treasury-stock purchases were $300.0. The quarterly dividend was increased 7% to $0.19 per share.
Changes versus prior year and segment trends
- Q2 sales increased across all three segments: Consumer Domestic rose 1.3% to $678.2, Consumer International rose 6.4% to $145.1, and SPD rose 4.9% to $74.7.
- Consumer Domestic growth reflected higher sales volumes, but price/mix pressure—particularly promotional spending—reduced profitability. Q2 segment income before tax fell to $123.7 from $141.6.
- Consumer International reported a Q2 loss before tax of $23.7 versus income of $16.2, primarily because of a $39.2 pension settlement charge. Excluding this unusual item, the reported comparison is materially affected by the settlement.
- SPD Q2 income before tax increased to $13.7 from $10.7, supported by volume and favorable price/mix.
- Q2 gross margin pressure reflected unfavorable price/mix, higher commodity costs, and foreign exchange, partly offset by acquired-business margins, volume, and cost improvements. SG&A also rose with the pension charge and acquisition-related costs.
Outlook, unusual items, and risks
- The filing provides no specific full-year revenue or EPS guidance. Management said operating cash flow and borrowing capacity were expected to cover 2017 capital expenditures of approximately $45, dividends at the approved rate, and share repurchases as implemented.
- The $39.2 pre-tax international pension settlement charge ($31.5 after tax, or $0.12 per share) was recorded in Q2 SG&A. The company completed termination of the plans and reported no further material defined-benefit pension obligations at June 30.
- The Brazilian chemical business was sold in March 2017; the company recorded $3.5 of first-quarter severance and other costs. Acquisitions during the period included Viviscal for $160.3 and Agro BioSciences for approximately $75.0, with a potential additional Agro payment of up to $25.0 tied to sales performance.
- Subsequent event: The company agreed to acquire Water Pik for an estimated $1,033, subject to adjustments, with closing expected in Q3 2017 and customary conditions. It issued $1,425 of senior notes on July 25 to fund the acquisition, repay its $200 term loan, and repay part of commercial paper borrowings. The acquisition had not closed as of the filing.
- Competition and promotional pressure in laundry products, commodity and foreign-exchange movements, consumer demand, integration of acquisitions, and financing are cited risks. A supplier-related contract lawsuit seeks damages exceeding $20; the company is vigorously defending it, has recorded an immaterial reserve, and says the possible loss cannot yet be estimated more precisely.
Important facts for investors to verify
- Track whether sales volume growth can offset continued unfavorable pricing and promotional mix, and whether margins recover.
- Assess underlying Consumer International performance apart from the one-time pension charge and monitor acquisition-related costs.
- Verify Water Pik closing, final purchase price, integration results, and the effect of the new debt on interest expense and leverage.
- Monitor operating cash flow and working capital, particularly inventory and accounts receivable, alongside the company’s substantial repurchases and dividends.
- Follow developments in the Scantibodies litigation; the potential exposure is uncertain and may exceed the immaterial reserve.